How Demographics Will Support Canada's Condo Market

Canada's condo market just keeps rolling along, with record numbers of new buildings being completed in Toronto during the last few years and lots of condo action in Vancouver and other cities across Canada.

Worried analysts keep wondering how long the condo boom, which has been strong for more than a decade, can keep going. Super-low mortgage interest rates have been a major contributor to the boom but analysts say they won't last forever and when rates go up, condo sales may plummet.

That may be so, but even with higher rates, Canada's demographics show that demand for condos isn't about to slow down soon. The next generation of buyers may be enough to weather a rate increase.

"While much focus is cast on brash calls of overvaluation, mortgage rate wars and mortgage rules, demographics are playing a less-publicized yet important role," says Robert Kavcic, senior economist at BMO Capital Markets in a recent report.

"The baby boom generation grabs most of the attention on this front, but their children, the echo boomers, pack a heavy economic punch as well. While the housing market is expected to level off, a few more years of demographic support could help fend off a much deeper correction that many fear."

Canada is currently going through the biggest intergenerational transfer of wealth in history, according to BMO Investorline. About $1 trillion will be transferred during the next 20 years, to baby boomers and to the echo-generation, currently aged 20 to 38. Both generations have money and both are committed to home ownership.

Baby boomers have pushed Canada to the highest rate of home ownership ever and their children are just as committed to buying a home. A recent study by Ipsos Reid for the Ontario Real Estate Association says that 82 per cent of Ontarians believe real estate is a good investment. They say owning a home gives them a sense of pride and that it's important to them.

The study also says 28 per cent of Ontarians are planning to buy a home within the next two years. In Toronto, 41 per cent of those surveyed say they will be buying a condo apartment.

In 2002 when a larger group of echo-boomers entered their prime first-time home buying years, Kavcic says the condo boom took off. He says while increased immigration to the cities helped, the boom was led by aging echo boomers buying condos and moving downtown into cities across the country.

"Looking ahead, growth in this age group is projected to cool, but still expand solidly for a few years yet, only stagnating by around 2018," says Kavcic. "From a strictly demographic perspective, that would place us around the seventh inning of the secular bull market in Canadian housing before conditions become unfavourable around the turn of the decade, unless immigration rises enough to fill the gap."

Kavcic says as the echo boomers get older and move into the 37-46 age group, they will likely start looking for a single-family home in which to raise a family.

He says that at age 30, there is about a 50/50 split between those living in condos and those in single or semi-detached homes, "but the latter jumps to more than 70 per cent by the mid-40s.

"This would suggest that as the broader housing market softens this decade, the single-detached segment will be buffered by the aging of this powerful demographic -- trust me, backyards and quiet streets move way up the priority list."

Combined with development constraints in cities like Vancouver and Toronto, this will keep pushing demand for single-family homes and may drive prices higher, he says.

"One wrinkle is that as the echo boomers move into their late 30s, baby boomers will be moving into their late 60s," Kavcic says. Some of those boomers will downsize and move from their single detached homes into condos. But many other boomers are choosing to remain in their large homes for as long as possible.

"The cascade of boomers out of their single-detached homes that many fear (if it happens at all) should easily be absorbed by the echo generations, at least in the coming years," Kavcic says.

Away from Canada's largest cities, real estate has already cooled off. He says since much of the 25-34 population is being lured to larger cities, "in the coming years, demographics will pose a much more significant challenge for Quebec and Atlantic Canada, barring a significant turnaround in migration flows or a jump in immigration, while remaining supportive in Ontario and Western Canada, particularly in major cities."

The Ipsos-Reid survey says that 84 per cent of Ontario residents think it makes more sense to own a home rather than rent over the long term.

"Consumer perceptions often reflect what is currently happening in an area but they have also been known to signal the next moment," says Sean Simpson, vice-president of Ipsos Public Affairs. He says there has been a lot of speculation about what will happen next in the real estate market. "These insights may offer a glimpse into what lies ahead."